Area-Rate Clause & Lookback option in Oil & Gas Sector:


1) Area-Rate Clause :

An indefinite price adjustment clause found in some long-term gas contracts that provides for increase of the contract price if any regulatory agency permits or prescribes a higher price for gas sold in the same area. Under the regulatory scheme of the Natural Gas Act, from 1961 to 1978, maximum prices were set on an area basis.

Area-rate clauses were drafted to permit sellers to collect the highest price permitted by the regulatory authority in the relevant area.


2) Lookback option :

Grants the right to buy (sell) the underlying energy commodity at the lowest (highest) price reached during the life of the option.

Effectively, the best price from the point of view of the holder becomes the strike price.